A Roth IRA (Individual Retirement Account) is a special retirement plan established under the US law, whereby you pay taxes on the money going into your account and then all future withdrawals are tax-free. It was established by Taxpayers Relief Act of 1997 and it was sponsored by Senator William Roth.
The benefits of Roth IRA are personalized and it all depends on an individual’s tax bracket. Investing for retirement can be challenging since a lot of money earned is lost in taxes and other contributions. It doesn’t get any easier especially for people starting up on their careers because most often than not the income doesn’t allow.
Roth IRA has a lot of advantages and makes the most sense considering the future earnings will not be subjected to taxes. This fact is mainly cemented if one expects their tax rate to be higher during retirement than their current rate.
It is safe to say that Roth IRA is the ideal saving plan especially for young, low-income who won’t miss the upfront tax deduction and will benefit from decades of tax-free compounded growth. The plan appeals to any individual who would like to enjoy minimized tax deduction during retirement and anybody is eligible provided they have earned income from a job.
Since 2014, any individual below 50 years can contribute to Roth IRA up to $5,500 per year. The figure increases to $6,500 per year for individuals aged 50 years and above. The money is invested in securities (usually common stocks and bonds) and other financial products as part of an individual’s retirement plan. Also, it can be an individual retirement annuity, which guarantees that the recipient will receive payments at a certain level for a certain period of time or all through their entire life.
There are income eligibility limits and if one has too much money they can’t contribute to a Roth IRA. For singles or a single head of a household, the maximum contribution allowed can only be reduced if the modified adjusted gross income is between $114,000 and $129,000.
For married individuals filing jointly, they can contribute the maximum amount to the plan if the income is between $181,000 and $191,000.If one’s contribution is above these levels, then they can’t contribute to the plan. Since some married couples file their tax returns separately, special rules have been given to them and none can contribute if their income exceeds $10,000.
One can withdraw the contributions and earnings at any time without penalty after five years but only if that person is about 59 and a half years of age. However, this stipulation does not apply to the contribution and one can withdraw at any time without any penalty.
Additionally, in case of death, disability of the accounts holder or use of up to $10,000 to purchase a principal residence for the owner or family member, exceptions to this stipulation are made. Roth IRA plans bear minimum risks and also since distributions from Roth IRA are not subject to tax, they do not increase gross income. With this, the retiree is able to maintain a lower tax bracket than they would assuming their retirement account was not supplied with Roth contributions.
Unlike traditional IRA, this plan can reduce estate taxes and it can also diversify tax risk. In case the account holder dies, the spouse becomes the sole beneficiary and the conversion of the contributions to the spouse’s account are made with no penalty.
If one continues to work even during retirement, they can still make contributions and also heirs pay no income taxes on inherited Roth IRA although they are required to take distributions of their lifetime. The account is left to the investor’s estate if he/she doesn’t need the money.